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PLC - Does a pending criminal investigation against a witness, or setting-aside proceedings at place of arbitration, prevent enforcement in Switzerl…
Does a pending criminal investigation against a witness, or setting-aside
proceedings at place of arbitration, prevent enforcement in Switzerland? (Swiss
Supreme Court)
Resource type: Legal update: case report
Status: Published on 26-Nov-2014
Jurisdiction: Switzerland
In decision 5A_165/2014, the Swiss Supreme Court considered whether a pending criminal investigation against a witness, or setting-aside
proceedings at place of arbitration, prevent enforcement of a foreign arbitral award in Switzerland.
Prof. Dr. Nathalie Voser (Partner) and James Menz, J.D. (Counsel), Schellenberg Wittmer Ltd (Zurich) (Schellenberg Wittmer Ltd
represented Y in the Swiss court proceedings)
Speedread
In a German-language decision dated 25 September 2014 and published on 21 October 2014, the Swiss Supreme Court decided that a
criminal investigation against two witnesses for false statements was no reason to refuse enforcement of a foreign arbitral award where the
witnesses' statements did not affect the arbitral award. Further, the court ruled that setting aside proceedings at the seat of arbitration that
had no real prospect of success were no reason to suspend enforcement in Switzerland. (Decision 5A_165/2014.)
Background
Article 194 of the Swiss Private International Law Act (PILA) provides that the recognition and enforcement of a foreign arbitral award in
Switzerland is governed by the New York Convention (www.practicallaw.com/6-205-5196).
Article V(2)(b) of the New York Convention provides that the recognition and enforcement of an arbitral award may be refused if it would be
contrary to the public policy of the country in which recognition or enforcement is sought.
Article VI of the New York Convention provides that the enforcing authority may adjourn the decision on enforcement if an application for
the setting aside or suspension of the award has been made at the seat of arbitration.
Article 328(1)(b) of the Swiss Code of Civil Procedure (CCP) provides that a party can apply to the court of last instance to re-open
proceedings leading to a judgment that has become res iudicata, if a criminal investigation establishes that the proceedings that led to the
judgment were affected, to the detriment of the applicant, by conduct constituting a crime or offence. Conviction by the criminal court is not
necessary.
Facts
On 29 March 2011 and 25 April 2012, an international arbitral tribunal in Sweden rendered two awards in favour of Y against X. On 2 July
2012, Y sought enforcement of these awards in Switzerland under Article 194 PILA and to the New York Convention and relying on the
applicable Swiss debt collection mechanisms. X objected but on 22 November 2013, the lower court instance in Zurich upheld
enforcement.
On 20 January 2014, X appealed the enforcement decision to the second instance, the Cantonal court of Zurich, at the same time seeking
a suspension of the enforcement proceedings pending the outcome of a criminal investigation in Germany. The Cantonal court rejected the
appeal on 23 January 2014, following which X appealed to the final instance, the Swiss Supreme Court.
X raised two arguments. First, it argued that recognition of the award would violate Swiss procedural public policy under Article V(2)(b) of
the New York Convention, because witness statements made during the arbitration had given rise to a criminal complaint with the German
public prosecutor. In particular, X contended that a criminal investigation was pending against witnesses A and B for having wrongfully
disputed the authenticity of a specific exhibit during the arbitration and thus committed perjury. X argued that, if A and B were criminally
liable, and had the arbitral tribunal recognised this circumstance, the arbitral award would not have turned out the same way. Moreover, X
argued, in interpreting the Swiss ordre public within the meaning of the New York Convention, the Swiss courts should have applied Article
328(1) CCP by analogy, under which it is not necessary to demonstrate that the award would have been different had the alleged criminal
conduct not taken place.
Y argued that a criminal investigation alone could not suffice to prevent enforcement and that in any event, even if the testimony by A and
B had been false, that would not have affected the arbitral award. Y argued that the arbitral tribunal did not consider the exhibit in question
material to the outcome of the arbitration. The two lower instances agreed with Y on this point.
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PLC - Does a pending criminal investigation against a witness, or setting-aside proceedings at place of arbitration, prevent enforcement in Switzerl…
X's second argument was that the enforcement proceedings should be suspended under Article VI of the New York Convention, because
proceedings to set aside the award were pending in Sweden and because immediate enforcement would result in X's bankruptcy.
Decision
The Swiss Supreme Court rejected X's appeal.
On the first issue (criminal investigation against two witnesses), the court agreed with X that in principle, an arbitral award that was
fraudulently obtained can violate procedural public policy. However, in the view of the court, the requirements of Article V(2)(b) of the New
York Convention are not satisfied where the criminal act of a participant to the arbitration does not affect the award. Rather, the criminal act
must have affected the outcome of the arbitration.
The court further stated that, contrary to X's view, the same is true under Article 328(1) CCP (assuming, for present purposes only, that
Article 328(1) could be used to interpret the meaning of Swiss procedural public policy under the New York Convention).
In this case, X had been unable to demonstrate that the alleged perjury affected the outcome of the arbitration. In fact, X had not even
shown that the complaint filed with the German criminal authorities had resulted in any action by them.
On the second issue (suspension), the Swiss Supreme Court noted that Article VI of the New York Convention gives the enforcing court
wide latitude as to whether to suspend enforcement, as well as whether to order provision of security as a condition of suspension. Citing
various Swiss and international arbitral literature, the court held that the decision should be based on the circumstances of each particular
case and on the prospects of success of the setting-aside action, but that in any event, the court should not deny enforcement only
because an application to set aside was pending at the seat of arbitration.
Here, because the public policy argument was so weak, X had not demonstrated any reasonable prospect of success of its application to
set aside. The court also reasoned that the principle of procedural expedition favoured enforcement, since it was "completely uncertain"
how long the setting aside proceedings in Sweden would take.
Finally, the Swiss Supreme Court made short shrift of the bankruptcy argument, arguing that this concern did not outweigh the interest in
enforcement.
Comment
This decision should be welcomed. A pending criminal complaint against a person involved in an arbitration should not be sufficient to
prevent enforcement of an award under the guise of procedural public policy. From a policy point of view, one might debate whether in
proceedings to set aside an award, a strict requirement of causality between a criminal or fraudulent act by a witness and the outcome of
the award is desirable, in case it promotes an "anything goes" approach. On the other hand, the proper remedy for fraud should in the first
instance always be a criminal investigation against the perpetrator itself. The parties to the arbitration should not benefit, or suffer (as the
case may be), from such conduct if it did not actually affect the award.
The refusal to stay enforcement is also justified where there was no real prospect of X succeeding in setting aside the award in Sweden.
Deciding otherwise could prompt setting aside proceedings with the sole purpose of avoiding enforcement abroad, which in turn could give
losing parties bargaining power against the winning party in the arbitration, in the form of requesting "compensation" for not filing an action
to set aside the award. The result seems justified even where enforcement could result in bankruptcy proceedings.
Case
Decision 5A_165/2014 (Swiss Supreme Court).
Resource information
Resource ID: 0-589-7125
Published: 26-Nov-2014
Products: PLC Arbitration - International, PLC Arbitration Email, PLC US Law Department
Related content
Topics
Arbitral Awards and Challenges (http://uk.practicallaw.com/topic0-203-6785)
Enforcement: Arbitration (http://uk.practicallaw.com/topic6-521-5771)
Practice notes
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11/27/2014
PLC - Does a pending criminal investigation against a witness, or setting-aside proceedings at place of arbitration, prevent enforcement in Switzerl…
Arbitration in Switzerland (http://uk.practicallaw.comtopic9-513-8272)
Enforcing arbitration awards in Switzerland (http://uk.practicallaw.comtopic1-573-3968)
Standard clause
Switzerland: ad hoc arbitration clause (http://uk.practicallaw.comtopic6-521-7299)
Glossary
New York Convention (http://uk.practicallaw.comtopic6-205-5196)
Country Q&A
Arbitration procedures and practice in Switzerland: overview (http://uk.practicallaw.comtopic5-502-1047)
Litigation and enforcement in Switzerland: overview (http://uk.practicallaw.comtopic1-502-1695)
Case page
Decision 5A_165/2014 (http://uk.practicallaw.comtopicD-028-2501)
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